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Sealy Corp. Reports Operating Results (10-K)

January 25, 2010 | About:

Sealy Corp. (ZZ) filed Annual Report for the period ended 2009-11-29.

Sealy Corp. has a market cap of $292 million; its shares were traded at around $3.16 with a P/E ratio of 17.56 and P/S ratio of 0.23. ZZ is in the portfolios of Richard Pzena of Pzena Investment Management LLC.

Highlight of Business Operations:

Through a merger with affiliates of Kohlberg Kravis Roberts & Co. L.P. ("KKR") in 2004, KKR acquired approximately 92% of the Company's capital stock. Subsequent to the initial public offering in 2006, KKR's ownership decreased. At November 29, 2009, affiliates of KKR controlled approximately 49.2% of our issued and outstanding common stock.

In the Americas and Europe, we also produce a variety of innovative latex foam, and visco-elastic "memory foam" bedding products for the specialty bedding category. The specialty bedding category has seen a significant downturn in 2009 sales as the economic environment has shifted the consumer's focus to, often lower priced, innerspring products. For the first nine months of calendar 2009, specialty bedding sales reported by International Sleep Products Association ("ISPA") were down 21.6% compared to a decrease of 10.5% for conventional mattress sales. Given their higher price points, specialty products are often sold with financing terms provided by retailers. The decrease in the availability of financing by the retailers due to the effects of the recent credit environment has put pressure on the high-end price points. While we have continued to introduce new specialty products in the past year, we have seen significant slowdowns in the sales of these products consistent with the overall trend of the market. However, we believe that the potential to increase market share continues to exist for future periods in this area as the economic environment improves. In our other international markets within the Americas, we also offer a wide range of products. In each market, we offer a full line of innerspring and specialty products under the Sealy and local brand names.

Our five largest customers on a consolidated basis accounted for approximately 25.5% of our net sales for fiscal 2009 and no single customer represented more than 10% of our net sales during fiscal 2009. While we believe our relationships with these customers are stable, many arrangements are made by purchase order or are terminable at will at the option of either party. In the U.S., we serve a large and well diversified base of approximately 3,000 customers, including furniture stores, specialty bedding stores, department stores and warehouse club stores. During 2008 and the first quarter of 2009, the economic environment became more challenging and caused a higher occurrence of bankruptcies for mattress retailers. However, we have seen a decrease in the frequency of bankruptcies of our customers in the second through fourth quarter of fiscal 2009. These economic conditions have also caused some smaller mattress retailers to exit the market. We continue to remain focused on monitoring our customer relationships and working with our customers during these unpredictable and difficult times. We have been able to maintain a leading market share among the top 25 U.S. bedding retailers by wholesale sales dollars even through this uncertain economic environment. We believe this is due, in part, to the strength of our customer relationships, our large and well trained sales force, effective marketing, leading brand names and a broad portfolio of quality product offerings.

Our U.S. business within our Americas segment represents the dominant portion of our operations. The U.S. bedding industry generated wholesale revenues of approximately $6.2 billion during the calendar year 2008, according to ISPA. Based on a sample of leading mattress manufacturers, including Sealy, ISPA estimates that wholesale revenues for these manufacturers decreased approximately 9.1% in 2008. This trend has continued into 2009 and based on information published by ISPA, during the first nine months of calendar 2009, the sample of leading mattress manufacturers has seen a significant slowdown in volume, which has caused wholesale revenues to decrease approximately 13.4% from the revenues experienced in the first nine months of 2008.

Our strategy to weather the current economic environment has been based on our breadth of product offerings at various price points. Through this period, bedding industry retailers have seen that increased traffic flow has become even more dependent on the introduction of new product. In response, we have continued our new product introductions during 2009 and plan to continue to introduce new and innovative products in future periods. We believe that there continues to be significant growth opportunities at the premium end of the market (that is, retail prices greater than $1,000 per queen size set) and as consumer demand returns, we believe that we are well positioned to take advantage of this growth. According to ISPA, mattress units sold in the United States by manufacturers at retail price points of at least $1,000, as a percentage of total industry mattress units sold, rose from 16.3% in 2003 to 26.6% in 2008. Even with the downturn of the economy in late 2008, this portion of the market has shown modest growth of 0.3% between 2007 and 2008. For 2008, this data was based on data representing 40.7% of total industry units shipped. Additionally, queen and king size mattress units sold in the United States, as a percentage of total mattress units sold, rose from 43.3% in 2000 to 47.4% in 2008, according to ISPA. The recent slowdown of the global economy has caused wholesale domestic innerspring revenue levels to decrease 10.5% from 2008 levels through the first nine months of 2009 based on information provided by ISPA. We have also seen a shift to products at lower price points during this timeframe.

The specialty bedding category, which represents non-innerspring bedding products including visco-elastic ("memory foam"), latex foam and other mattress products, accounted for approximately 17.1% of the overall U.S. mattress market revenue in 2008 according to ISPA. Though we have seen significant historical growth in this sector, through the first nine months of 2009, wholesale revenue for specialty bedding from a sample of leading manufacturers decreased 21.6% from the levels experienced in the first nine months of 2008. We believe that once the retail environment begins to strengthen, consumers will return to purchases of specialty product and we are positioning ourselves to take advantage of this through continued new product introductions.

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